The infrastructure-led initiative, China's leaders believe, could create new markets for Chinese companies and provide a boost for struggling banks and state-owned enterprises.

The Belt and Road Initiative (BRI) - officially known as the Silk Road Economic Belt and the 21st Century Maritime Silk Road policy - is a development strategy proposed in 2013 by the Chinese government that aims to create the world's largest platform for economic cooperation, including policy coordination, trade and financing collaboration, and social and cultural cooperation. The main focuses are in infrastructure, transportation, and energy.

The Initiative was launched at a critical point in China's economic transformation.

In recent years, China has gone through structural transformation and is faced with domestic production overcapacity. By helping many developing Asian countries that lack the capacity to undertake major infrastructure projects on their own, China might soak up some of the overcapacity in the industrial sector and could even boost the domestic economy with demand abroad. The infrastructure-led initiative, China's leaders believe, could create new markets for Chinese companies and at the same time, provide a shot in the arm to the struggling banks and state-owned enterprises.

Therefore, when we want to evaluate the performance of The Belt and Road Initiative, the performance of Chinese companies with overseas direct investment (ODI) in the belt-road countries is a vital gauge to measure. Does the Belt and Road Initiative promote Chinese overseas direct investment? Du and Zhang answer the question in their 2017 paper in the China Economic Review.

Market and Regime Suggest Yes

Intuitively they think the answer is yes for two reasons. First is from the market's perspective. The BRI strategy's massive investment in infrastructure would improve the quality and availability of logistics facilities in the belt-road countries, which creates conditions for the foreign direction investment (FDI) inflow from China. The improved infrastructure can also raise trade flows, which can in turn indirectly promote China's ODI in the belt-road countries. Furthermore, the high-level international political cooperation, policy coordination, and government support embedded in the One Belt One Road initiative can considerably reduce host country policy uncertainties and political risks for Chinese firms investing in the belt-road countries, which further encourages China's ODI in the belt-road countries.

Second is from the regime's perspective. China is characterized with state capitalism under an authoritarian regime. State-owned enterprises (SOEs) play a pivotal role in the commanding heights of the national economy, and they are the reliable forces to achieve government goals. In contrast, a vibrant private sector makes up the majority of the production of national output and employment. Disadvantaged in gaining access to resources, such as capital, land, etc., non-state-owned enterprises (non-SOEs) are typically willing to cooperate with local or national authorities. They tend to follow the call of the government in fulfilling various national or local goals. Thus, enterprises in China might respond actively to increase ODI. Examining how Chinese enterprises respond to this national economic strategy can help shed light on the mechanisms of implementation of the national strategy.

In Du and Zhang's paper, they further disentangle the concept of ODI into greenfield investment and merger and acquisitions (M&As).

Acquisitions vs. Greenfields

They find that the Chinese overseas acquisitions of targets in the belt-road countries increased considerably in the years following the announcement of the BRI national strategy (years 2014 and 2015), but the greenfield investment in the belt-road countries was growing at a slower pace than acquisitions in the belt-road countries and greenfield investments in the non-belt-road countries. There are signs that Chinese investment firms shifted a portion of ODI from greenfield investment to acquisitions in the post-BRI years to capture the investment opportunities more quickly.

Chinese ODI Amounts in the Belt-Road Countries:

M&A versus greenfield investment. (Source: Du and Zhang, 2017)

In terms of acquisition target industries, energy and power and industrials still remained as the top two in the belt-road countries in the post-strategy years, but the importance of high technology and financials rose rather quickly, occupying the third and fourth positions. This is largely consistent with the trend of industrial diversification in the overall structure of target industries of China's overseas acquisitions.

The Belt-Road Countries: Top 5 Sectors

before and after the policy announcement. (Source: Du and Zhang, 2017)

Du and Zhang also pay attention to the overseas acquisition activities of SOEs and non-SOEs. Both SOEs and non-SOEs, relative to their counterparts from other major acquirer countries, increased significantly in the two post-BRI years. Strikingly, SOEs played a leading part in acquisitions in infrastructure sectors in the belt-road countries. A large chunk of these acquisitions could be part of the infrastructure investment plan embedded in the BRI initiative. Non-SOEs were particularly active in acquiring targets in non-infrastructure sectors in the belt-road countries, probably encouraged by the expected improvements in infrastructure, expected free trade policy arrangements, expected government policy coordination, and political cooperation, etc.

Their close look at the destination countries of China's overseas acquisitions demonstrates that Central and West Asia, Western Europe, and Russia are favorable destinations of Chinese ODI in the belt-road countries. It is likely that the expected improvement in infrastructure following SOEs' ODI in those regions encouraged non-SOEs to expand into the non-infrastructure sectors there.

Du and Zhang's study demonstrates that the Belt and Road Initiative, an infrastructure-led economic integration blueprint implemented under an authoritarian regime, prompted Chinese enterprises to expand their ODI in the belt-road countries. The BRI strategy is just unfolding, and we might expect more in next five years.